Hedge fund manager David Einhorn, whose short selling famously helped to bring down Lehman Brothers bank, has been fined £7.2m for insider dealing by the UK regulator.

Einhorn, the owner of Greenlight Capital, engaged in "market abuse" in relation to a fundraising by pub group Punch Taverns in June 2009, the Financial Services Authority (FSA) has ruled.

According to the City watchdog, Einhorn was told by a corporate broker acting on behalf of Punch Taverns that the company was preparing a significant equity fundraising. Moments after the telephone conversation ended, Einhorn gave instructions to sell all of Greenlight's holding in Punch.

At the time these instructions were given, Greenlight held 13.3% of Punch shares. Over the next four days Greenlight sold 11,656,000 Punch shares, reducing its holding in Punch from 13.3% to 8.89%.

On 15 June 2009, Punch announced a fundraising of £375m, after which the price of its shares fell by 29.9%. Greenlight's trading had thereby avoided losses of approximately £5.8m for the funds under its management.

The fine is a major blow for Einhorn's reputation. His career has been built on a talent for spotting wrongdoing in other firms. In a statement the hedge fund boss called the decision "unjust and inconsistent" and said the company had paid the fine rather than continue the "arduous fight".

In a statement, the FSA said it accepted that Einhorn's "insider trading" was not deliberate because he did not believe that what he had been told was inside information.

"However," it said, "this was not a reasonable belief. Investment professionals are expected to handle inside information carefully regardless of whether they have been formally wall-crossed. This was a serious case of market abuse by Einhorn and fell below the standards the FSA expects, particularly due to Einhorn's prominent position as president of Greenlight and given his experience in the market."

Tracey McDermott, the FSA's acting director of enforcement and financial crime, said: "Einhorn is an experienced professional with a high profile in the industry. We expect someone in his position to be able to identify inside information when he receives it and to act appropriately.

"His failure to do so is a serious breach of the expected standards of market conduct. It is highly damaging to market confidence when privileged shareholders commit market abuse, and the high penalty reflects the seriousness of his breach."

Einhorn was fined £3.6m including disgorgement of financial benefit. Greenlight was fined £3.65m. He said: "We believe that this action is unjust and inconsistent with the law and with prior FSA enforcement precedent. However, rather than continue an arduous fight, we have decided to put this matter behind us and concentrate on managing our business."

He added: "We have always strived to set an example of good conduct and ethics, and we take compliance very seriously. We didn't believe in 2009, and we don't believe now, that there was anything wrong with our conduct and our actions. The fine is for trading in advance of a decision that had not been made, and the FSA concedes we did not believe we had any inside information. We did not enter into any confidentiality agreement, we explicitly requested that we not be given confidential information, and we do not believe we were given any such information. Further, all the witness testimony supports our view."

The big shorter

Einhorn began shorting Lehman in 2007, claiming to have uncovered dubious accounting practices at the bank.

Previously, Allied Capital, another target of Einhorn's, accused him of market manipulation and sparked calls for an investigation. After a six-year fight, it transpired that Allied had broken securities laws and an investigation was then launched into the regulator's handling of the affair. Einhorn chronicled the often vicious spat in his book Fooling Some of the People All of the Time.

An accomplished bridge player, Einhorn took up poker a few years ago and finished 16th in the 2006 World Series, donating his $650,000 winnings to Parkinson's disease charity the Michael J Fox Foundation, where he is a board member.

Last year he tried to buy a minority stake in the New York Mets baseball team. But talks broke down, reportedly over Einhorn's plans to position himself to take over the club at some unspecified future date.